In a letter to the editor cross-posted to Cafe Hayek on October 23, Steven Horwitz, in responding to a reader who croticizes George Will’s recent column on Elizabeth Warren, challenges “a number of fallacies about the recession and financial crisis”.

In trying to distinguish ‘capitalism’ from the “government intervention and crony corporatism” that Horwitz sees as the cause of our current mess, Howitz seeks to lay blame off on government, while absolving from responsibility the firms that benefitted from the government inverventions:

If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector.

Nonsense. Even if it was government that created signals that mucked up the works, government acted in response to pressure from people who stood to benefit, and we have every right – nay, we OUGHT – to be upset with them, as well as with others who acted to suit themselves, knowing that the downside would be borne by others.

Our outrage is our final line of defense against damaging behavior; we should tune and direct it, not dampen it. More on “Moral suasion” here.

Let’s face it: our financial sectors is a massive, stinking mess, resulting proximately from rampant moral hazard encouraged by government laws and regulations – chiefly, the deposit insurance that substituted Government and .taxpayers’ pockets for oversight by depositors who no longer considered that they were putting their money at risk.

The central role of ‘government’ does NOT. however, eliminate the responsibility of men and women in various institutions that took advantage of incentives to maximize personal gain while shifting risks and losses to others.

In this, I have to disagree strongly with Steve, who seems to want to hold only ‘Government’ responsible. Emphatically No – to increase responsibility we must not simply restore risk, but also demand better behavior and call out those whose actions are shameful.

The relaxation of leverage standards much discussed above took place only because investment bankers who had gone public – and thus were playing largely with public investors’ capital and not their own – wanted to load up on risk, the better to reap massive profits during the bubble and downloading risks to shareholders (in addition to risks deliberately played off to insured banks, Franie and Freddie, and to other market participants giddied by the bubble).. They all played this game so well that they made billions in bonusses, even as they made their own institutions so opaque that they could no longer measure each other’s counterparty risk and brought each other crashing down. Lehman’s CEO Fuld, who made over $100 million annually in compensation and bonusses in each of his last few years, is just one example.

Those who sought, took advantage of and approved of this nonsense, and then sought and approved of bailouts ALL richly deserve and NEED our strongest condemnation.

None of this “We can’t blame drivers for ‘accidents’ that hurt others, because Government messed up the signals” for me.

In face of growing economic dislocation and discontent, Dr. Reisman serves up his usual, disappointing fare of portraying powerful (and provident) ‘capitalists’ as the victim of goverment and of the yammering mob. We all just KNOW it’s those with much less wealth who are corrupting government, socializing losses via the banking system and trying to raise barriers of entry that divide markets and limit competition, right?

Sure, the rabble may not well understand how capitalism is SUPPOSED to work, but they’re damned right that it isn’t , in large measure as a result of deliberate gaming and cynical socialization of risk by our so-called ‘capitalists’.

Rather serving up useful insights – or even appropriate outrage – Dr. Reisman is serving up smoke screens to protect those who bear the greatest blame for destroying laissez faire capitalism and Hayek’s essential “market morals”:

Those whom Reisman is actually defending are not pure capitalists, acting under laissez faire competition, but largely rapacious and irresponsible CEOs of large, listed companies, who, freed from any control of their erstwhile shareholder ‘owners,’ use government to crush competition, etc.

In effect, Dr. Reisman is defending the very people MOST RESPONSIBLE for DESTROYING laissez faire capitalism. For shame, George!

In his capable defense of our non-existent system of laissez faire capitalism, the good Dr. Reisman is curiously blind to the ways in which the ‘capitalists’ he defends are themselves BOTH the primary drivers and beneficiaries of the destruction of capitalism that he rightly lauds.

In Reisman Land, it’s always the powerful and corrupt ‘capitalists’ who are the victims of the relatively powerless hoi polloi.

Even Dr. Reisman’s throwaway references to ill-gotten gains shift focus and responsibility from powerful men ACTING to use government to the black box of government, which acts mysteriously and punishes as much as rewards firms: “government is permitted to depart from a policy of strict laissez-faire and thereby arbitrarily reward or punish firms”.

None is so blind as he who will NOT see. Dr. Reisman appears to be lacking a theory of Human Action, or rather, a theory in which men with money, in order to mitigate the rigors of laissez faire competition or to get easy money from selling goods and services to government, sometimes ACTIVELY coordinate their action with men more directly controlling the levers of government.

Instead, Dr. Reisman only sees the small man – laborers, officer workers, professionals and consumers – avariciously acting to use government to tie down and confiscate the wealth of the rich, noble, and heroic yet powerless capitalist.

Does the good Dr. not see that his capitalists, far from free and responsible men, act through GOVERNMENT-CREATED and licensed “limited liability” entities that are selected precisely because they shield the owners from personal responsibility for the harms their firms cause to others and the public and large? And that the intimate government role, the resulting harms and the lack of personal accountability are the very reasons why the victims then band together to petition government to “do something!”, rather than simply chasing the owners and their servants with pitchforks?

I agree with Dr. Reisman that ongoing events are a morality play writ large. But unfortunately Dr. Reisman (like many people now fed up with rampant crony capitalism who now blame ‘capitalism’ and the 1%) describes it to us in black and white.

Perhaps his mother took his Kodachrome away, but can’t we at least expect some shades of gray?